The pandemic shut down of metro Denver offices for the past 10 months hasn’t created a fire sale on office space lease rates.
At least not yet.
But the impact has been felt far and wide though Denver’s business industry as tenants are finding plenty of available space through subleases – 4.7 million square feet of it is available, according to the real estate frim CBRE. Landlords are feeling more pressure as vacancy rates for metro Denver climbed to 15.6%, the highest in 10 years, according to the Q4 2020 CBRE office report.
And the number of transactions dropped dramatically. There was 4.4 million square feet of office space leasing activity in 2020 – the lowest activity level in 20 years, according to Savills Q4 report. That’s a stunning 49 percent drop from 2019’s leasing activity level of 8.6 million square feet.
“It’s going to get softer before the market comes back – that’s pretty simple economics of supply and demand,” said Todd Roebken, executive managing director for Savills. “You can’t give space away right now, nobody wants it. That will drive the market.”
That 4.7 million square feet of sublease space available now is up a staggering 86% from Q1 2020, when it stood at 2.2 million square feet, according to CBRE. At lease a third of that released space came from oil and gas companies.
Thus far, landlords haven’t been willing to budge on lease rates – though they’ve offered plenty of free rent and other concessions to get deals signed. That’s evidence by lease rates climbing slightly year-over-year, from $28.29/sf to $29.98 at the end of 2020, according to Savills’ Q4 report.
Savills is a tenant rep company and Roebken handles companies looking to set up, or expand, headquarters in Denver.
Commercial real estate reports across the industry, and brokers too, have used the phrase “wait and see” more times in recent months than perhaps ever.
“Elongated deal cycle has been a common theme of 2020,” said CBRE’s Pete Schippits, president of the company’s Mountain-Northwest Division. “Our market works on efficient data points and clarity, that’s been disrupted by the pandemic in so many different ways.”
Some of those ways include: Tenants coming up on lease renewals not wanting to sign long-term deals; Company leaders trying to evaluate how much space they’ll need going forward; Businesses previously committed to new space not wanting to sign long-term deals; Some companies deciding to bail on all office space completely as all employees have worked remotely.
“The common thread has been clients telling me ‘it’s making me crazy seeing what we’re paying for space that we’re not using right now. What should we do?’” Roebken said. “I tell them ‘hold if you can’.”
Telecommunications technology company Avaya Inc. was one of the companies giving up large amounts of space late last year. After its long-term lease for 530,000 square feet of office space across three buildings in the southwest submarket expired, the company vacated. That was a sizeable majority of the total 934,000 square feet released to the market in Q4, CBRE reports.
Avaya still has a regional headquarters building in Thornton. Company officials did not return an email Friday seeking comment.
Lockheed Martin inked the biggest lease of Q4 for an entire 200,000 square foot building at 8740 Lucent Blvd. in Highlands Ranch, according to CBRE.
What’s been driving the steady, if slightly increasing lease rates, has been new office space still coming on the market that has been under construction for years.
CBRE reports five new buildings were delivered in Q4 with 415,000 square feet of new space available. What’s more, there is another 3 million square feet of space under construction.
“That class A space, especially brand new, tends to be the longest lease commitment because it’s a new development,” Schippits said. “It’s in cold, dark shell condition so it takes more tenant improvements and a longer-term lease ... you can’t really kick the can down the road for a one or two year lease extension on that one.”
The good news on that front is that businesses in or coming to Denver, at least for the past decade, have leased up most of that new space. Schippits said developers created 3.9 million square feet of new office space in that time, and 3 million of it was rented before 2020.
“We almost filled all our new buildings that were delivered,” he said.
So what’s next?
The cheerleaders in the business world, the Downtown Denver Partnership and the Metro Denver Chamber of Commerce, say there’s still plenty of economic development activity occurring and many businesses are still looking to locate and hire in Denver.
"We think where we lose some of that office space to remote or hybrid workers, we're going to see a lot of it made up in job growth," said Tami Door, president and CEO of Downtown Denver Partnership.
"Coming into this, Denver's employment base downtown is growing like crazy. That has not stopped," Door added. She expects the next 18 months to be up and down as businesses readjust, but DDP is sticking to its rosy 5-year forecast for job growth downtown.
"We believe the escalating increase of employees in these growing companies is going to offset what gets lost in remote and hybrid work. We are also getting a lot of companies from the West Coast looking at coming here. That's a net gain even if they do a little bit of remote/hybrid work."
Roebken said those statements ring true from what he’s seen in the past 10 months.
“Those companies are really pro Denver and pro Colorado,” he said. “The job force and the climate for doing business here is really good now, as long as we don’t screw it up by raising (corporate) taxes or instituting policies that are not business or pro-growth friendly. ... Denver will have a nice big catcher’s mitt, I predict.”
That belief also comes from the fact office rates on the coasts are still double or triple what companies can get in Denver, and add to that Colorado’s quality of life advantage.
“That our housing market is so strong is a good indicator that people are moving here,” Roebken said.
Both said working environments going forward are going to consist of the hybrid model of some remote work, with some office work.
“Many folks miss the culture and the collaboration,” Schippits said.
“People want to go back to the office,” Roebken said. “They’re dying to get off Zoom.”
The trend towards giving employees the flexibility to work remotely was a developing trend well before the pandemic. Everyone’s time at home only accelerated that trend – much like it did to the other rapidly growing trend of online shopping replacing retail from brick and mortar shops.
“Even with that hybrid model, you’re still going to need touch down space for your employees and clients,” Roebken said.
“What’s interesting about that is the “we” space, like conference rooms and collaboration space, actually takes more room than “me” space of work stations,” Schippits said. “We’re not seeing the highest desire for employers wanting employees to be fully remote ... even if it’s two or three days a week, there still must be space employees have access to.”
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